The future of retirement provision: Berlin has the duty to act

Provision for retirement is a highly political issue that preoccupies many people – and that is particularly apparent in an election year.  There is currently a range of concepts and ideas for reform on the table, aimed at making retirement provision fit for the future. But will anything actually happen? Michael Fauser, CEO of ERGO Vorsorge Lebensversicherung, explained what the main issues are and told us what reforms he would most like to see.

Michael Fauser, the next German Bundestag election is less than nine months away, and it is already looking as though it will no longer be possible to introduce some of the planned pension reforms, e.g. the reform of the Riester pension. Do you still see any chance of reforms, and what needs to be addressed first, in your opinion?

Most urgent is definitely a reform of the Riester pension. If what we are currently hearing from Berlin is right, and a reform is to be delayed until after the Bundestag election, that would be a bitter blow for all insured persons. It is an important issue because it affects a lot of people in Germany. I would therefore like to see more decisive action to implement a reform of Riester more quickly. Progress also needs to be made soon with compulsory insurance for the self-employed. Of course, self-employed people should not have to cope with additional costs in the current situation. I would therefore advocate a decision on a reform in this legislative period, but with a longer transition period. In the long term, I also think that the information that has to be provided to insured persons needs to be generally simplified. They are not sure what to do with most of the information they are given, which is not conducive to achieving the aim of providing comprehensible insurance products.

Staying with Riester for the moment, what has to change, in your opinion, to make the product attractive to insured persons again in the future?

Riester is fundamentally a good product for those looking to supplement their retirement provision. The aim is also to offer people who couldn’t previously afford it a good pension in future. To achieve that, the Riester scheme first has to be simplified, that is, the check of a person’s entitlement to supplements should be carried out at the outset. The current procedure is, in short, to pay first and check later. This means that beneficiaries can be required to repay supplements already received, which in turn results in unnecessary work for customers, the authorities and insurers. Reversing the order would provide considerable relief and save costs, which would benefit customers at the end of the day. 

What about the guarantee level with Riester? Does the guarantee of 100% of contributions paid still work with the current low interest rates? 

Definitely not in my opinion. The current rules actively deny people the opportunities in the capital markets for their retirement provision because, to cover the 100% guarantee, we have to invest heavily in conservative investments, so the customer has less chance of a return. The guarantee level therefore needs to be reduced and made more flexible as we cannot assume that the current interest rates will change in the short or medium term. Otherwise, the possibilities for long-term investments with opportunities for higher returns for customers will be very limited.

You have already said yourself that COVID is posing particular challenges for the self-employed, not least in the areas of culture and the restaurant trade. How can we prevent them being disadvantaged in their retirement provision in the long term as a result of their current loss of earnings? 

That’s an important issue, also for me personally. The self-employed have little or no entitlement to statutory benefits, as has become clear in the lockdown. It is therefore all the more important for them to have a private pension, but still too many of them are loathe to take one out. So in my opinion, compulsory insurance for the self-employed is inevitable if this group in society is to be protected from the risk of poverty in old age. Too many taxi drivers, café and restaurant owners and artists face financial difficulty on reaching retirement age and can’t actually afford to retire. However, as I have already mentioned, in the current situation it would certainly be reasonable to allow a transition period for the reform to give time for the financial consequences of the COVID pandemic for many self-employed people to level out.

Federal Employment Minister Heil announced in the Bundestag at the beginning of December that he would address this problem. So you must be optimistic ...  

Let me say straight away that I do welcome Employment Minister Heil’s plans, but we will have to wait and see what the reform looks like. And it remains to be seen whether there is sufficient time between now and the election for the coalition to find a compromise. In any case, I will be following developments closely, because it was and still is important to offer the self-employed the prospect of receiving a pension and to guarantee sufficient retirement provision for them at the end of their working lives.

You have already mentioned the obligation to provide information. Why do you have a problem with that? Surely the information is meant to help customers understand their pension arrangements and better compare the costs involved. 

That’s correct in theory, but I doubt it is the case in practice. The trend in recent years can best be summed up as “the more the better”, but in fact the opposite is true. In many cases, the flood of information confuses, or even worries, customers more than it helps them. The information sheets provided should therefore concentrate on what customers really need to know to make sure they understand the product and to give them proper guidance. This is something that both the authorities in Germany and at European level, and life insurers need to take seriously.   

The time left before the Bundestag election is short, and the list of planned reforms to retirement provision is long. If you had to pin yourself down now, which of the planned reforms is most likely to be implemented before the election? 

As a realist, I’m careful about making wishes. However, I would welcome early agreement on as many points as possible so that these important issues don’t get ground down in the election campaign. Broad, cross-party consensus probably already exists on the objective of a secure and adequate pension for everyone, and that makes me cautiously optimistic.